Firm age, business cycles and aggregate labor market dynamics
- Publisher: Universiteit van Amsterdam
Job creation and destruction rates fall with a firm's age, young businesses have higher exit rates, conditional on survival they grow faster and given their employment shares they create relatively more jobs than older firms. In fact, recent studies show that the well established negative relationship between a firm's size and its growth rate vanishes once its age is taken into account. I extend these findings by showing that, compared to old firms, employment growth in young firms is more volatile and that business start-ups are important for unemployment rate developments. Next, I build a general equilibrium model with heterogeneous firms that is consistent with these cross-sectional facts and delivers realistic aggregate labor market dynamics. The model is used to evaluate a government policy supporting young firms, a measure proposed under the recent "Startup America" initiative of the White House. The results suggest that such a policy should focus mainly on reducing barriers to entry. Supporting existing firms disrupts the selection process of successful firms, reduces average firm productivity, and results in lower levels of output.